Fitch Ratings has upgraded Ageas SA/NV’s long term Issuer Default Rating (IDR) to ‘A’ from ‘A-‘. The outlook on the IDR is stable. Ageas SA/NV is the ultimate holding company of the Ageas group (Ageas).
Fitch has also affirmed Ageas Insurance International NV’s (an intermediate holding company) long-term IDR at ‘A’. The agency has further affirmed AG Insurance’s and Ageas Insurance Ltd.’s Insurer Financial Strength (IFS) ratings at ‘A+’. The outlooks on the IDR and IFS ratings are stable.
Fortis Settlement Agreement
The Fitch rating actions follow Ageas’s announcement that it has reached a settlement agreement with several claimant organizations with regard to all civil proceedings related to the former Fortis group for events that occurred in 2007 and 2008.
Ageas also announced that it has reached an agreement with its directors and officers insurers. All the parties involved will submit the settlement agreement to the Amsterdam Court of Appeal in accordance with Dutch applicable procedures, Fitch noted.
The upgrade of Ageas SA/NV’s IDR reflects Fitch’s expectation that the Amsterdam Court of Appeal will declare the settlement binding for all eligible Fortis shareholders, which may take between 9 to 12 months.
Previously, the litigation risk was reflected in Ageas SA/NV’s IDR being one notch lower than the IDR of the other entities in the group.
Although the settlement will be recognized in Ageas’s first quarter 2016 financial statements, Fitch considers it to be positive for the IDR of Ageas SA/NV. The agreement, if declared binding by the Dutch court, reduces significantly litigation risk and enhances future financial flexibility.
Impact of Proposed Settlements
The net impact of the proposed settlements on the group IFRS net result is €889 million ($1 billion), or around 8 percent of 2015 group shareholders’ funds. Ageas had provisioned €132.6 million ($149.4 million) in 2014 against litigation risk.
The expected net cash impact is around €1 million ($1.1 million), said Fitch, adding however that Ageas’ management said this amount will only be paid after completion of legal proceedings. Ageas had a €1.3 billion ($1.5 billion) net cash position at end-2015.
Fitch expects the company’s cash position to be boosted by the sale of its life insurance business in Hong Kong, due to be completed in Q1 2016.
When the full impact of the settlement is taken into account, Fitch’s Prism factor-based capital model (Prism FBM) score for Ageas remains at least “very strong” based on 2014 results, which Fitch expects to have continued in 2015.
The financial leverage ratio marginally increases due to lower shareholders’ funds, but it remains below Fitch’s median guidelines for the ‘A’ IFS category. “We expect both the Prism FBM score and FLR to improve following the sale of the Hong Kong business,” Fitch said.
The affirmation of Ageas’s ratings reflects the group’s robust underwriting profitability in 2015, with the reported life operating result improving 7% year on year to €565 million ($636.7 million) and the group’s combined ratio improving to 96.8 percent (2014: 99.6 percent), despite the impact of the December 2015 floods in the UK.
Possible Rating Scenarios
Fitch said Ageas’s ratings could be downgraded if the group’s Prism FBM score falls to “strong” on a sustained basis. The ratings could also be downgraded if the group’s profitability weakens significantly, with a pre-tax operating profit return on equity below 5 percent (2014: 9 percent) and a pre-tax operating return on assets below 0.4 percent (2014: 0.7 percent).
The ratings could be upgraded if Ageas’s profitability improves over a sustained period, with a pre-tax operating profit return on equity of at least 12 percent, a pre-tax operating return on assets of 1.1 percent or above, and group earnings being in line with ‘AA’-rated peers.
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